AXA calls for 'repressive' US Fed bond buying to wind-up

AXA chief executive officer Henri de Castries said France's largest insurer would welcome steps by the US Federal Reserve to scale back monthly asset purchases that have depressed bond yields.
By · 18 Sep 2013
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18 Sep 2013
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AXA chief executive officer Henri de Castries said France's largest insurer would welcome steps by the US Federal Reserve to scale back monthly asset purchases that have depressed bond yields.

"One of the reasons for which, not only me, but we as insurers, are comfortable with the fact that the Fed would start to taper is very, very simple: The long-term interest rates are too low," Mr de Castries said.

US Federal Reserve policy makers, led by chairman Ben Bernanke, are meeting on Thursday and will weigh up whether to slow $US85 billion in monthly bond buying that was meant to stimulate the economy.

The program has pressured investment income at insurers that hold fixed-income securities to back obligations, while rewarding borrowers with near record-low costs.

"The game which has been played over the last three years, it's financial repression," Mr de Castries said. "It's the savers paying for the rescue of the banking system."

Bond yields have jumped since Mr Bernanke said in May that the central bank could "take a step down in our pace of purchases". The rising rates have led to a rally in insurance stocks. A Standard & Poor's index of life insurers has jumped 16 per cent from May 21 through Tuesday, compared with the 1.7 per cent gain in the S&P 500. Paris-based AXA, which sells life insurance in the US, has surged 20 per cent. AXA teamed up with AMP for the $13.3 billion acquisition of the AXA Asia Pacific business two years ago.

Mr De Castries' comments echo remarks from other insurers. Executives at MetLife, Alleghany Corp and the General Reinsurance unit at Berkshire Hathaway have all said low rates are a burden for their businesses. Australia's QBE Insurance, which has a sizeable US business, has seen its shares largely flat over the same period, although analysts say it is impacted by swings in the Australian dollar.

"Central bankers continue to force liquidity in the banking system without any objective proof that it is helping," Alleghany chief executive Weston Hicks said in a letter to shareholders earlier this year that compared monetary easing to mediaeval bloodletting.

AXA has been increasing bets on corporate bonds and infrastructure debt, helping hold the company's portfolio yield steady, Mr de Castries said. About 45 per cent of AXA's $US635 billion general account was in government debt. Corporate bonds made up 31 per cent of the holdings, which back insurance liabilities, according to the insurer's website.

Mr De Castries said investments in bridges, toll roads and airports offer reliable long-term cash flow that match the duration of his company's liabilities. They also can protect against inflation.

"There is a huge need for infrastructure everywhere in the world, even in the mature-market countries where state budgets are so tight," he said. "Infrastructure is clearly a category where all the insurance companies and long-term investors throughout the world are looking."

The Federal Reserve has kept its benchmark rate near zero since December 2008 and has embarked on three rounds of quantitative easing to bolster the economy. In the third, the central bank has been buying $45 billion of treasuries and $40 billion of mortgage- backed bonds each month.

Terry Lillis, chief financial officer at Principal Financial Group, said last week that he's looking forward to the Fed scaling back purchases because the economy runs better when yields are higher, especially for long-term savers. A reduction in bond buying would be a sign that the economy is improving, he said.

Steve Kandarian, chief executive of MetLife, the largest US life insurer, said in March that low interest rates penalise savers and harm the ability of life insurers to offer some guarantees.

Mr Bernanke has said savers will benefit from an improving economy spurred by the central bank's stimulus efforts.

Individuals with fixed-income holdings may also own homes, run businesses, have jobs or hold stocks, meaning they benefit from a strong economy, he said.

"Only a strong economy can create higher asset values and sustainably good returns for savers," Mr Bernanke said last year. Bloomberg
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